Know Your Market

China’s Explosive Dairy Demand Signals Potential U.S. Market Boon

Jul 01, 2013

Chinese consumer spending on dairy products has increased in double-digit numbers and is expected to grow by nearly 120%.

By Ryan Cox, INTL FC Stone

Like the phoenix rising from its ashes, China’s ascension from poverty-stricken nation to economic power house has changed the world order. To think, it was only 40 years ago that most of the country was immersed in poverty. It’s mind boggling.

So, how has this rapid shift occurred? Chinese domestic policy? U.S. consumerism? Regardless of the reason(s), China’s GDP is now second only to the United States, surpassing Japan in 2010. Today, China is the largest market for automobiles, the world’s largest exporter, as well as one of the largest importers of U.S. grains.

China is an economic force, a burgeoning political force and a boon for U.S. dairy products should farmers and multinationals position themselves appropriately. Food security is a top priority for the Chinese with water resources and arable land continuing to present a challenge for domestic production. As a result, self-sufficiency is something that the Chinese have yet to master, as you can see below.

(Source: OECD)

The statistics are staggering. It is estimated that within the last decade some nearly 200 million people have moved into urban areas within China. 200 million! That is over half of the current U.S. population. This shift does not seem to be waning either, with some estimates pointing toward 65-70% of the Chinese population in urban areas by 2030. Urban dwellers are now the majority, and this demographic shift is essential in unlocking China’s potential.

But why? With this rapid urbanization come shifts in cultural norms. Chinese diets are changing. This rapid urbanization has led to a rising middle class and demand for higher protein diets. Milk consumption alone has tripled in the last decade, and it is estimated that urban dwellers consume nearly five times more dairy than their rural counterparts. Since China does have a domestic production issue in both dairy and grains, import dependence has roughly doubled. From 2001-2012, import dependence increased from 6 % to roughly 13% for all agricultural trade, resulting in a trade deficit of 31 billion dollars in 2012, according to the United Nations FAO.

On the dairy front, Chinese consumer spending has increased in double-digit numbers, with U.S dairy exports exceeding $440 million in the last year. Although this is impressive, the dairy market in China is potentially in its infancy. As demand contracts in the developed world, it will be the consumers of the emerging markets that will offer opportunity for dairy exports as well as other agricultural products. As Oceania suppliers rush to fill Chinese demand, their U.S. counterparts should be concentrating on the void left in China and elsewhere in emerging markets. Dairy consumption is expected to grow by nearly 120%, and China has neither the tools nor resources to support this explosion in demand.

U.S. operations are a model for the Chinese. The Chinese understand this, and one could expect further acquisitions in food-related industries outside of the recent Smithfield bid. As we know, the Chinese are the world’s largest pork consumers, and the Smithfield acquisition is probably the first of many. Although the Chinese may, in fact, want more access to U.S. markets through acquisitions, it is the knowledge (of genetics, operations, etc.) that Chinese seek in order to further their food security agenda.

And while some fear a rising China, said fear is a pessimist’s view. As Winston Churchill said, "A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."

Ryan Cox is a Risk Management Consultant with the Chicago office of INTL FCStone. INTL FCStone offers comprehensive risk-management and margin hedging programs and services to dairy producers, processors, traders and end-users. You can reach Cox at 312-456-3613.